Exchanges ramp up sustainable investment products as ESG disclosure lags behind

Greenlights

Global exchanges are making the most of growing investor demand for sustainable products and ramping up their provision of ‘green’ bonds, making them the most commonly offered ESG investments for the first time, according to The World Federation of Exchanges’ (WFE) sixth annual sustainability survey. 

Eighty two per cent of the exchanges surveyed by WFE perceived investor demand for sustainability-related products in 2019, and 18 per cent said demand was “extensive”. The survey was conducted earlier in 2020, with responses referring to the 2019 calendar year, and a total of 61 exchanges participated.

The proportion of exchanges offering some ESG products registered only a small increase, rising to 59 per cent compared to 57 per cent in the previous year. Within that, green bonds became the most widely used out of all ESG products, surpassing sustainability indices for the first time.

“The exchange industry leadership of sustainability continues to evolve. As the world seeks to rebuild a better, more inclusive society amid a global pandemic that has challenged many widely-accepted practices, exchanges are leading by example and are determined to be part of that solution,” says Nandini Sukumar, chief executive officer at the WFE.  

Among those that improved their ESG bond capabilities in 2019, BME Spanish Exchanges’ fixed income market recorded its first green bond issuance, worth EUR50 million, the Johannesburg Stock Exchange has planned to launch two types of ESG bonds in 2020, and the Korea Exchange is introducing dedicated segments for green, social and sustainability bonds in mid-2020.  

Their motivations for engaging with sustainability are changing. While “sustainability concerns” were still the most common reason exchanges cited for launching initiatives (88 per cent), “expanded business opportunities for the exchange” was close behind with 84 per cent citing it as their motivation.

“Overall, sustainability has expanded from a “corporate responsibility” issue to become an opportunity for exchanges to develop new business,” reads the WFE’s report.

Another exchange building up the sustainable investment market is the London Stock Exchange. It introduced two initiatives in 2019: its Sustainable Bond Market (SBM) which includes new dedicated segments for social and sustainability bonds, alongside its green bonds segment, as well as the Green Economy Mark to recognise listed companies with 50 per cent or more of revenues from environmental solutions.

David Harris, head of Sustainable Business, London Stock Exchange Group (LSEG), says the exchange group’s global investor base become “increasingly focused on sustainable investment”. Harris says the group’s capital markets businesses, London Stock Exchange and Borsa Italiana, can enable equity and fixed income and fund issuers to navigate and access that pool of international capital. 

“The global transition to a more sustainable and net zero economy continues to be a focus across capital markets. Both the investment/finance and corporate communities are increasingly developing climate transition strategies.”

An area where exchanges need to ramp up efforts is in ESG data disclosure. WFE’s survey found that disclosure was encouraged or required of issuers by 85 per cent of responding exchanges, only one percentage point up from 2018. The number of exchanges planning this requirement in the future has almost doubled.

LSEG’s CEO, David Schwimmer co-wrote a letter in July in support of Task Force on Climate-Related Financial Disclosures (TCFD), which helps companies figure out what information to share.

“As the risks and opportunities arising from climate change become increasingly material, investors need to have the right information, disclosed according to clear, consistent, and comparable standards. Together stock exchanges can mobilise global capital markets to address climate change and support a sustainable transition,” reads the letter.

Schwimmer and former Bank of England governor Mark Carney, have invited global exchanges to join a coalition under the UN Sustainable Stock Exchange initiative, of exchanges committed to climate disclosure.